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Young ICCA is a world-wide arbitration knowledge network for young practitioners and students, established in 2010. It aims to promote the use of arbitration by exposing new practitioners from all corners of the globe to the international practice of arbitration.

Fair and Equitable in CETA – Finally Defined?

By Eric van Eyken ‎(Young ICCA Scholar, University of Miami)

A key question surrounding the new EU Model Investment Treaty (“EU Model BIT”) is how it would address the concept of Fair and Equitable Treatment (“FET”). A recently leaked draft version of the Canada-EU Trade Agreement (“CETA”) demonstrates a novel and unexpected approach that may revolutionise this fundamental international law standard.

Arbitral tribunals considering claims under FET have differed widely in their approaches – ranging from complete discretion to requiring the investor prove that a FET component constitutes established state practice. This diversity of views and uncertainty in the law has led to significant criticism of awards applying novel approaches to FET.

Bringing significant certainty and clarity to the concept, the November 2013 CETA draft includes an enumerated list of treatment that violates the FET standard. This list approach, while consistent with the recommendations made in the 2012 UNCTAD Report on investment protection, is an otherwise innovative inclusion in a BIT. Article 9(2) of the draft CETA defines FET to include:

a. Denial of justice in criminal, civil or administrative proceedings;

b. Fundamental breach of due process, including a fundamental breach of transparency, in judicial and administrative proceedings.

e. Abusive treatment of investors, such as coercion, duress and harassment; or

f. A breach of any further elements of the fair and equitable treatment obligation adopted by the Parties in accordance with paragraph 4 of this Article.

The CETA draft also includes a “legitimate expectation … upon which the investor relied in … but that the Party subsequently frustrated” as a violation of FET.

Announcements in the fall of 2013 that CETA negotiations were substantially completed suggest that the November FET provisions (nearly identical to the May 2013 version) may represent a final agreement. Assuming that no further changes are made, this new approach to FET would represent a radical change in investment arbitration and a marked divergence from the starting positions of both Canada and the EU.

Initial Positions & North American Origins

CETA’s FET provision could have followed a minimalist approach. Professor August Reinisch, of the University of Vienna, described the early EU position towards FET as favouring concise language:

As regards the level of detail [of FET], the instructions appear to favour the traditional European approach by adhering to a rather concise treaty text, without clarifications limiting the scope of FET and indirect expropriation as they are known from US and Canadian BITs as well as NAFTA. In fact, avoidance of “NAFTA-contamination” was reportedly a specific wish of some Member State officials.

The Canadian negotiators put forward their own model language, adopted from the NAFTA 2001 FTC Note, tying FET to the customary international law standard:

2. The concepts of “fair and equitable treatment” and “full protection and security” in paragraph 1 do not require treatment in addition to or beyond that which is required by the customary international law minimum standard of treatment of aliens.

A NAFTA inspired list?

Despite apparent reservations by European negotiators against “NAFTA-contamination”, the agreed upon definition of FET is noticeably consistent with NAFTA jurisprudence, especially as identified by Professor James Crawford, of Cambridge University, in the 2004 Waste Management II decision:

98. …. Taken together, the S.D. Myers, Mondev, ADF and Loewen cases suggest that the minimum standard of treatment of fair and equitable treatment is infringed by conduct attributable to the State and harmful to the claimant if the conduct is arbitrary, grossly unfair, unjust or idiosyncratic, is discriminatory and exposes the claimant to sectional or racial prejudice, or involves a lack of due process leading to an outcome which offends judicial propriety—as might be the case with a manifest failure of natural justice in judicial proceedings or a complete lack of transparency and candour in an administrative process. In applying this standard it is relevant that the treatment is in breach of representations made by the host State which were reasonably relied on by the claimant. [Emphasis added.]

However, the fact that the CETA negotiators arrive at such a similar list is perhaps not surprising given that the Waste Management II standard has been widely adopted by subsequent tribunals.

An Evolving Standard – Now with Dialogue

The CETA draft clarifies the content of a concept that has been amorphous since espoused by the Neer Tribunal. Investors will be satisfied, as they no longer have the near impossible task of defining whether a particular minimum standard of treatment is included under FET. Similarly, states will benefit through limiting tribunal discretion by adopting a defined investment law standard.

The CETA negotiators were equally attentive in ensuring that FET remains an evolving standard by providing two mechanisms for expanding the contents of FET:

3. In addition to paragraph 2, a breach of fair and equitable treatment may also arise from any other treatment of covered investments or investors which is contrary to the fair and equitable treatment obligation recognized in the general practice of States accepted as law.

4. In accordance with X [exact reference to be determined regarding the procedure], the Parties shall every X years [or regularly], or upon request of a Party, review the content of the obligation to provide fair and equitable treatment.

Sub-Article 3 allows investors recourse to the classic toolbox of international lawyering by demonstrating that the CETA content is only a current minimum standard of treatment. Sub-Article 4 builds in an evolutionary process by calling upon Canada and the EU to regularly review the content of FET.

These regular meetings, possibly with additional state participation should the EU Model BIT find further adherents, may finally move the evolution of the FET standard from arbitrators divining at state practice to states actually making their voices heard.